Philanthropy News Digest interview with Paul Connelly of Bessemer Trust
Philanthropy News Digest
July 31, 2014
At the turn of the twentieth century, great industrialists of the Gilded Age, men such as Andrew Carnegie, John D. Rockefeller, George Eastman and Julius Rosenwald, began in earnest to turn their attention to philanthropy. Controlling vast personal fortunes that grew larger by the day and ever-mindful of the social disruptions and widening income inequality that had come to characterize America, they began, in the words of historian Robert Bremner, “to found institutions capable of distributing private wealth with greater intelligence and vision than [they] themselves could hope to possess.”
Institutions like the Carnegie Institute and Carnegie Corporation of New York; the General Education Board and Rockefeller Foundation; MIT and the Eastman School of Music; the Rosenwald Fund and Chicago’s Museum of Science and Industry helped establish the template for organized philanthropy as we know it and, in the words of TIME magazine founder Henry Luce, helped make the twentieth century “the American century.”
Today, a new economic revolution is roiling the planet, disrupting old ways of thinking and doing and contributing to levels of income inequality not seen since the 1920s. At the same time, a new generation of philanthropists, inspired by the example of Carnegie, Rockefeller and others, are leveraging their wealth, networks, and know-how to address seemingly intractable and urgent challenges.
Paul Connolly has had a ringside seat on the changing philanthropic landscape for almost twenty years – first as an officer and director at consulting firm TCC Group, where he oversaw the firm’s capacity-building and nonprofit and philanthropy practices, and today as director of philanthropic advisory services at Bessemer Trust, a privately held wealth management and investment advisory firm. Through his writing (Navigating the Organizational Lifecycle: A Capacity-Building Guide for Nonprofit Leaders) and frequent thought pieces in sector-focused publications, presentations at the Council on Foundations’ annual convenings and other national conferences, and travels as a trainer and facilitator, he has had his finger on the pulse of the growing and increasingly dynamic philanthropic sector in the U.S. and has helped shape its evolution.
PND caught up with Connolly earlier this month and asked him, among other things, about foundations’ ability to move the needle on deeply entrenched social problems, the difficulty of measuring impact, and the generational dynamic in philanthropy.
Philanthropy News Digest: You joined Bessemer Trust last year after more than sixteen years at the consulting firm TCC Group, where you served in a variety of roles and established yourself as a social sector thought leader. Why the change?
Paul Connolly: While at TCC Group, I had the chance to work with many talented colleagues and remarkable clients who were deeply committed to the greater social good. The firm tripled in size while I was there, and I had the opportunity to help steer that growth and provide strategy, capacity building, and evaluation assistance to a burgeoning and stimulating mix of nonprofits, philanthropies, and corporate community involvement programs.
When Bessemer Trust approached me about this job, I felt ready for a new challenge, and it seemed like an excellent setting to positively influence social impact in a different way. In my new position, I am privileged to guide individual philanthropists as well as established foundations. And because we are in the midst of what some are calling a “golden age of philanthropy” – more foundations are being formed, major gifts are getting bigger, and the pace of the massive intergenerational wealth transfer is accelerating – Bessemer is a great place to make a meaningful difference. Plus, it’s a growing firm with a stellar reputation that values the philanthropic advising function. So it seemed like the right job at the right place at the right time.
PND: Bessemer, which was established as a family office in 1907 by Henry Phipps, a co-founder of Carnegie Steel, today serves over twenty-two hundred families with more than $97 billion in assets. Do all those families include philanthropy in their wealth-management strategies?
PC: Virtually all our clients incorporate philanthropy into their wealth-management strategies in some way. The purpose, scope, timing, and form of their giving vary widely, depending on the client’s financial resources, motivations, values, and family and business context. Some clients are active in charitable giving during their lifetimes, others prefer to endow a foundation or designate bequests as part of their estate planning, and many practice a combination of the two. In the same vein, certain individuals prefer recognition for their donations, while others prefer to remain anonymous. So, they employ different vehicles for giving to help them achieve their particular goals.
Bessemer has about $4.4 billion in assets under supervision associated with five hundred and fifteen family and independent foundations, endowments, and trusts that collectively award more than $220 million in grants annually. In addition, many of our larger clients have professionally staffed foundations that are not directly connected to our firm. Our clients also contribute extensively both through individual gifts and, increasingly, donor-advised funds, which are managed by Bessemer Trust, community foundations, or other entities.
PND: You mentioned a few of the different vehicles available for charitable giving. Is there a dollar threshold for which Bessemer recommends starting a foundation instead of contributing to a donor-advised fund?
PC: Due to the greater administrative costs incurred by foundations, we usually suggest a starting size of at least $1 million if the client intends to continue adding funds in the future. An ideal target for establishing a private foundation is somewhere between $5 million and $10 million.
PND: What do you tell clients who may be interested in giving not only money but their time?
PC: We are definitely seeing more and more clients who want to donate their time as well as their funds to nonprofits. Some are younger donors who grew up volunteering and want to continue providing hands-on support. Others are successful executives who are retiring, want to start a new career chapter devoted to civic engagement, and have lots of energy and wisdom to offer. A case in point is a client who sold her human resources company and is now devoting her time to providing pro bono assistance to a few nonprofits that are dedicated to helping veterans enhance their employment skills and secure stable jobs. As you might imagine, her industry knowledge and connections have proven extremely valuable to those organizations.
The key is to help clients clarify their goals and get them thinking about how they can most effectively give, and then help them find the right nonprofit match. Some clients derive the most satisfaction by providing direct voluntary service, such as preparing food in a soup kitchen or tutoring a student who is struggling in school. Others may want to contribute their expertise, leadership ability, and network access by serving on a nonprofit committee or board.
We also realize that when a prospective donor wants to provide pro bono assistance, the nonprofit benefiting from that assistance usually wants to cultivate the relationship so that over time the donor will provide financial support as well. With that in mind, we counsel our clients to clarify expectations around their volunteer roles, responsibilities, and time commitments, as well as the amount of money they might be expected to “give” or “get” to support the nonprofit financially.
PND: How, if at all, do generational dynamics affect your conversations with clients?
PC: Bessemer Trust is more than a hundred years old, and we work with multiple generations of families. Much of our work is facilitating discussion and decision-making among family members about their shared values and interests, as well as ways to engage future generations in philanthropy.
That said, we have seen certain shifts in families’ approach to philanthropy. Some younger donors have a more engaged style, are skilled at leveraging their networks, and are more willing to take risks. They also may be more interested in causes like the environment, advocacy, and animal welfare. Recent research by 21/64 and the Johnson Center for Philanthropy has documented these generational changes in a compelling way.
In some cases, we’ve been able to help different generations discover common ground for their philanthropic interests, which can be a unifying force. We’re currently facilitating such a dialogue with a family where the parents want to more actively engage their three adult children in the family foundation. We’re guiding them to focus on areas of shared interest, such as their cultural and ethnic heritage and funding research for a disease that has affected family members personally.
Another option may be to pursue individual philanthropic paths through separate giving structures. Bessemer has helped members of the next generation in another family set up their own donor-advised funds because they were dispersed geographically and had ideologies and passions that diverged not only from those of their parents, but from each other.
PND: What is your message to high-net-worth individuals and wealthy families that are trying to think about philanthropy in a different way?
PC: Clients may want to take their giving programs to the “next level” for various reasons. For example, a foundation may have a new board chair who wants to institute more analytical and results-oriented practices. One client with a family foundation had a liquidity event that suddenly increased the principal by a substantial amount. At that point, there was a lot more money to dispense and the family wanted to do it prudently. Another client made a decision to spend down his foundation within three years, which created a sense of urgency and changed expectations about the desired end results.
Whatever the situation, we encourage clients who want more “bang for their buck” to consider several ways that they can give “smartly” or more “strategically.” We might recommend sharpening the focus of their giving and setting clearer goals, so that instead of having a more diffuse impact in a lot of areas, they have a more meaningful impact on a smaller number of causes. Re-evaluating their philanthropic goals and learning along the way can be important, but we warn clients about not taking a strategic, metrics-driven approach too far and becoming overly prescriptive and accountability-oriented. We recently facilitated a board retreat for a foundation client that was grappling with how to strike a balance between quantitative and qualitative assessment. This particular philanthropy focuses on rural development in a developing country. The trustees appreciated receiving detailed data on how the foundation’s funding helped improve agricultural productivity and was used to combat poverty, but they also wanted to hear stories about how individual farmers, families, and villages were positively affected. For future board reports, they decided they wanted to be presented “no stories without numbers, and no numbers without stories.”
In addition, we might suggest offering a more flexible funding structure to some nonprofits. Too many short-term project-oriented grants and donations with lots of strings attached can hamper a nonprofit’s ability to succeed. If a client knows a nonprofit well and trusts its leadership, we may propose that the client provide multiyear operating support that is less restricted, which the nonprofit could then use to build its organizational capacity and cover some of its overhead costs. For example, one client who wanted to enhance health services for low-income individuals arranged it so that half of her funding to a particular nonprofit group went toward providing the direct services themselves, while half supported the organization’s general operating expenses.
Finally, we discourage clients from “reinventing the wheel.” Over the last hundred years, many funders have tried, succeeded, and failed, and their wisdom should be tapped. We connect clients to more experienced philanthropists willing to share their insights, and we inform them about opportunities to join forces with other grantmakers to achieve common goals.
PND: What advice would you give to a young high-net-worth individual who wants to become active in philanthropy sooner rather than later and is determined to drive change and create impact from the get-go?
PC: We would first help them figure out what particular issues they want to focus on, since some may be more time-sensitive than others and benefit from a more “front-loaded” giving strategy. If, for instance, a client wants to address climate change or aid research to help discover an AIDS vaccine, we can help them navigate ways to invest their philanthropic dollars strategically over a shorter time horizon. It’s not unusual to see generous donations when a disaster strikes, whether close to home or overseas, and we coach our clients on how they can support not only pressing emergency needs, but also ongoing recovery and rebuilding efforts.
In addition, we help clients determine the degree of control they want to have over how their funding is used. We might guide an entrepreneurial and highly engaged donor on how to establish an operating foundation to provide direct services or become an active investor in a venture philanthropy network. On the other hand, we might tell a donor who is still very busy in his or her career how to give in a more indirect manner, such as by investing in a community foundation, a funder collaborative, or an intermediary that is already doing valuable work.
Regardless of an individual’s giving interest or style, in some cases we might respectfully advise a client to try to be more patient and collaborative. Some enthusiastic donors may underestimate how difficult effective philanthropy can be, how long change can take, and how many constituents need to be involved. Oftentimes, the best way for us to increase their awareness is to connect them with more seasoned donors who are still active and were taught these lessons the hard way.
We can also help them learn by example about thoughtful philanthropists from the past. For example, Henry Phipps – who believed that individuals who have achieved great wealth should give back for the public good – distributed most of his philanthropic dollars while he was alive, much of it anonymously. His philanthropy addressed needs that were not only immediate but also long-term. He helped build enduring nonprofit institutions that are still thriving today, such as the Phipps Conservatory and Botanical Gardens in Pittsburgh and Phipps Houses, which builds affordable housing in New York City.
PND: Does philanthropy, which in the U.S. accounts for 2 percent of GDP – a figure that hasn’t changed for decades – have the resources to move the needle on issues like inequality, poverty, education reform, and chronic unemployment and underemployment caused by structural economic change?
PC: I believe philanthropy can help address some of these structural and entrenched problems in certain settings, but not that extensively on its own. Government funding and policy have much more influence on these issues. Indeed, some funders are investing more in public policy advocacy with the aim of influencing issues on a systemic level. For our clients who really want to try to tackle some of these deep-seated challenges, we might recommend the ways I mentioned earlier to approach their philanthropy in a more strategic, goal-oriented, and focused manner.
Geographic context also matters. In certain regions, strong place-based philanthropies can help move the needle in target communities. For example, the Jacobs Family Foundation in San Diego has dedicated its funding to support resident-led community development in “the Diamond,” a forty-five-acre neighborhood in the city’s Fourth District. Likewise, the Community Foundation of Greater Buffalo has focused some of its funding on reducing lead poisoning in communities within six particular zip codes in that city, while also investing to increase racial and ethnic equity in the broader region.
Finally, and this is a promising trend, more funders are working together to concentrate their support on scaling what works. The nonprofit sector is quite fragmented: Three-quarters of the more than one million nonprofits in the U.S. have annual operating revenues under $500,000. The highest-performing nonprofits deserve more resources so they can expand and amplify their positive social impact. Groups like the Growth Philanthropy Network, New Profit, and Tipping Point Community are helping funders collaborate to galvanize support for robust nonprofit organizations that have proven track records.
PND: “Impact” is a famously difficult thing to measure. Are you confident it can be measured on a consistent basis? What does the sector need to do to make that happen?
PC: There has been steady progress in measuring impact in the social sector, with more progress in some sub-sectors than in others. For instance, there are better standard outcome metrics in the education and youth development fields than for cultural and religious organizations. Groups like the Urban Institute and the Foundation Center are helping to facilitate better systems to develop and track shared metrics and distribute collective knowledge.
At the same time, I think some foundations are becoming more realistic about the limits of measuring their own impact. Increasingly, they’re realizing how hard it is to claim a direct causal connection between a grant and a consequent long-term impact, especially when enormous and complicated problems with many external variables are involved. Instead, more are concentrating on assessing short- and mid-term outcomes. They’re focusing less on performance measurement for accountability and more on evaluation for learning and improvement.
PND: In an article you wrote for the Stanford Social Innovation Review earlier this year, you noted that 75 percent of contributions to U.S.-based nonprofits come from individual donors and that the wealthiest 30 percent of those donors are responsible for three-quarters of that giving, with most of it directed to higher education, hospitals, religion, and the arts. All of which would suggest that philanthropy in the U.S. continues to be a pluralistic, Tocquevillian enterprise. That’s a good thing, right?
PC: I think the diversity of philanthropic sources and approaches in the United States is mostly a good thing. Individual giving, which makes up three-quarters of contributed nonprofit revenues, is a pretty vibrant mosaic. Of course, much of that giving is comprised of modest gifts to religious groups, schools, and community-based human service providers. Only 16 percent of the more than $335 billion in charitable contributions is funneled through foundations, while the vast majority of the ninety-six thousand foundations in the U.S. are small – that is, with assets under $5 million – and tend to give locally.
At the same time, there’s a deeply ingrained culture in America of giving to education as a way to enable others to better themselves and because it has lasting benefits for society. A century ago, philanthropists like John D. Rockefeller and Andrew Carnegie strove to not only respond to immediate social needs though charity, but to invest for the longer term and provide opportunities for others to help themselves.
At Bessemer, we see a number of motivations when clients make large gifts to universities. Some may have a deep personal loyalty to an alma mater and want to give back in order to provide opportunities to disadvantaged students with promise. Their rationale might be, “Someone once invested in me and that helped me succeed, so I want to do the same for others.” Others perceive it as a philanthropic investment that is likely to have a significant long-term return on investment, given that large universities tend to be durable institutions and make persuasive arguments for funding scientific research. Quite a few clients make endowed chair or professorship gifts to help maintain a sustainable funding stream over time.
PND: What types of donor networks and peer-to-peer learning opportunities do you recommend to clients?
PC:: It depends on their interests and where they are on the learning curve. For those who are newer to the field and want to learn from both experts and like-minded peers, Exponent Philanthropy – formerly the Association of Small Foundations – and the National Center for Family Philanthropy are often a good fit. For more experienced donors, Grantmakers for Effective Organizations, the Center for Effective Philanthropy, the Council on Foundations, and the various funder subsector-specific affinity groups might be more beneficial. For clients who want to do a “deeper dive,” we may suggest the Institute for Philanthropy, which conducts an intensive donor education workshop.
Many of the regional associations of grantmakers are superb resources, too, especially when a client wants to draw on extensive local knowledge and experience and interact with peer funders who are giving in the same community. More clients these days want us to help plug them into venture philanthropy, social enterprise, and impact-investing networks.
In addition to these external opportunities, Bessemer organizes its own educational sessions on philanthropy where clients can talk to and learn from each other about assorted issues, ranging from family foundation governance and engaging children in philanthropy to endowment investment policies and effective board and volunteering practices.
PND: You know institutional philanthropy well from your years at TCC. To an observer of the field, it often seems like a handful of big foundations dominate the conversation around most issues and that that often results in a lot of one-sided conversations. Would you agree? And what can individual donors and smaller foundations do to change that dynamic?
PC: A small number of major foundations do get lots of attention in the philanthropy world. In some cases, they truly are forging innovative strategies and attaining some impressive results, and others have a lot to learn from them. In other cases, they’re sharing too much about their accomplishments and not enough about how those accomplishments were achieved, and the mistakes they made and lessons learned along the way. Many also could do a better job of making their knowledge and practices more user-friendly and applicable to smaller funders and donors, who often are driven more by passion than technocracy. In fact, some large institutional foundations might be able to learn from smaller foundations about the value of more responsive, emergent, and bottom-up approaches as well as about balancing the “heart” and “head” in philanthropy.
Resources like Grantmakers for Effective Organizations’ new Smarter Grantmaking Playbook, Bridgespan’s GiveSmart toolkit and videos, and the National Center for Family Philanthropy’s publications and webinars are making constructive headway in bridging this divide and enabling access to more pertinent philanthropic practices to a broader range of funders. I still find Paul Ylvisaker’s essay “Small Can Be Effective,” which was published over twenty-five years ago, to be an excellent guide for funders that do not have huge staffs and grantmaking budgets. Looking ahead, I feel it would be beneficial for financial and legal advisors to learn more about philanthropic counseling so they can provide better guidance to high-net-worth clients.
PND: You spent a decade and a half as a consultant working with and for social sector organizations. Are there too many consultants in the space today? And what advice would you give a nonprofit organization that is thinking about hiring a consultant or consulting firm to help it with fundraising, program development, strategic planning, et cetera.?
PC: I suspect the number of consultants working with nonprofits and funders has probably kept pace with the rapid growth in the number and size of foundations and nonprofits over the past several decades. It’s a trend that mirrors the overall professionalization of the sector over the same period.
To your second question, I would tell a nonprofit thinking about hiring a consultant to clearly define the scope of work, get several proposals, and pay attention to chemistry. Be realistic about the amount of time that you, the client, will need to devote to the effort. Once a consultant is selected, create a formal written agreement that precisely spells out mutual expectations. And keep the lines of communication open throughout the entire engagement. That is critical and will go a long way to ensuring that the engagement is a win for all parties.
PND publisher/editorial director Mitch Nauffts interviewed Connolly via email in July. For information on the Newsmakers series, contact Mitch at firstname.lastname@example.org.